Ebook Logistics and retail management: Emerging issues and new challenges in the retail supply chain Part 2

Continued part 1, part 2 of ebook Logistics and retail management: Emerging issues and new challenges in the retail supply chain has presents the following content: supply chain strategy in the fashion and luxury industry; Tesco’s supply chain management; onshelf availability in UK retailing; the development of etail logistics; the greening of retail logistics;... Đề tài Hoàn thiện công tác quản trị nhân sự tại Công ty TNHH Mộc Khải Tuyên được nghiên cứu nhằm giúp công ty TNHH Mộc Khải Tuyên làm rõ được thực trạng công tác quản trị nhân sự trong công ty như thế nào từ đó đề ra các giải pháp giúp công ty hoàn thiện công tác quản trị nhân sự tốt hơn trong thời gian tới.

supply chain strategy in the fashion and

luxury industry

Alessandro Brun and Cecilia Castelli

introduction

Quite often, when referring to the consumer markets of such commodities

as textile and apparels, leather goods and accessories, the concept of ‘luxury’

is often confused with that of ‘fashion’ Indeed, while the luxury industry knew exceptional growth in the last decades (with few exceptions of steady situations within the recent financial and economic crisis), fashion com-panies in general have been facing quite a challenging period, mainly because

of the threats deriving from the continuous entrance of new competitors in

a market where immaterial capabilities are the key for success However, many academics and practitioners refer to the ‘fashion and luxury market’, because fashion and luxury companies often share the same management challenges One of these regards the definition of the most appropriate strategy for managing the supply chain

For this reason, the present chapter is dedicated to the basic principles of supply chain strategy The chapter is structured as follows: after discussing the relevance of supply chain management (SCM) in luxury and fashion, the typical structure of both the inbound and the outbound supply chain are described The typical approach of fashion and luxury companies is dis-cussed, with examples of noteworthy configurations taken from shoe, leather bags and underwear sectors The theory of the ‘segmentation tree’, advocating a portfolio approach for supply chain strategy, is then presented and discussed

the relevance of supply chain management

in luxury and fashion

In the fashion sector the competition is fierce, especially on the retail side (Newman and Cullen, 2002) The soaring of scale and bargaining power of major retail buyers in the market, the advent of own brands retail networks, the increasing globalization of sourcing and supply chain decisions are just some of the issues that have contributed to this complexity Indeed consumers are no more focused only on product characteristics; their purchasing attitude

is everyday more influenced by the ‘complete shopping experience’ provided

at the point of sale (Porter and Claycomb, 1997; Danziger, 2006), ie the contact point between the consumer and the supply chain Furthermore, increasing brand awareness sets the requirements for aligning operations along the supply chain towards the personality of the brand and its positioning (Moore and Birtwistle, 2004)

Hence, fashion markets are every day more synonymous with rapid change and, as a result, commercial success or failure is largely determined

by the organization’s flexibility and responsiveness (Christopher et al, 2004)

For the above reasons, researchers in the area of fashion started to focus

their attention on the domain of SCM (Harrison et al, 1999; Lowson et al, 1999; Christopher and Towill, 2002; Bruce et al, 2004; Christopher et al,

2004) Indeed the road towards competitiveness should go far beyond the management of a single company or even a supply chain, but passes through the management of the whole supply network (‘today competes the supply chain, not the company’, Christopher, 2000) and sustainable competitive advantages through low cost or high differentiation can be achieved only by managing the interconnections among the various organizations within a large network At the same time, increased customer and market orientation

is needed (Schnetzler et al, 2007).

SCM indeed proved paramount for firms to remain competitive, in a context where most activities are outsourced and the interaction of multiple actors is critical to ensure the delivery of products to the customer (eg Stevens, 1989) The concept of supply chain strategy has been developed as

an evolution of the consolidated framework of manufacturing and tions strategy proposed by Skinner (1969) and Hayes and Wheelwright (1985):

opera-the operations strategy framework (in terms of competitive priorities,

struc-ture and infrastrucstruc-ture) can be extended to the supply chain (Harland et al,

1999) In particular, to thrive in today’s highly competitive marketplace, supply chain strategy should aim at matching product characteristics and

customer requirements (Aitken et al, 2003; Li and O’Brien, 2001; Demeter

et al, 2006) Other contributions expressed the need to focus supply chain

strategy and align it towards the critical success factors (CSF) of the sidered product/market, ie those features in terms of product or service design that allow a firm to succeed into a specific market segment (customers select the firm’s product and not the competitors’ ones because of those specific

con-features; Rockart and Van Bullen, 1986) Product features indeed influence

supply chain configuration and management choices (Brun et al, 2008) and

should be taken into account in order to capture end users’ needs and

max-imize the value in their perspective (Al-Mudimigh et al, 2004).

Throughout the last two decades of the 20th century the fashion business appeared to emphasize the view that ‘marketing is everything’ (McKenna, 1991): companies stressed especially the aspects of building and promoting their brands As a consequence, both academic authors and market experts refer to ‘fashion (or luxury) brands’ rather than to ‘fashion (or luxury) pro-ducts’, to the point that the brand component is not separable from the concept of fashionableness

A brand is not a product, or a collection of products A brand is the total sum of everything a company does, which means creating a larger context

or an identity in the consumer’s mind The brand is the milestone on which such an identity (often translated into a lifestyle concept) can be proposed

to consumers

Brand power could be so important that, often, achieving a good brand reputation is enough for claiming a luxury positioning According to Kotler (2003) ‘if you are not a brand you are a commodity Then prices are every-thing and the low cost producers are the only winner’ Currently brands are so relevant that – in the logic of ‘brand extension’ – it’s by far more likely for a commodity or a relatively inexpensive product (eg steel jewellery) to become ‘luxury’ in the consumer’s mind when it carries a luxury brand’s name, rather than an unknown brand to achieve a luxury reputation thanks

to the preciousness or exclusivity of the material good: eg Cartier ferred its brand from jewellery to perfumes and accessories, Louis Vuitton expanded from handbags to clothing According to Aaker (1991), for fashion labels, according to their positioning, brand can become the reason for justifying a premium price due to its reputation and to the fact that it provides psychological satisfaction to customers (Davies, 1992) Especially

trans-in the fashion side of the luxury market, ‘value for the end user’ can be expressed everyday not only in terms of tangible characteristics of the product: often the pre-eminent aspects are the emotional and intangible contents conveyed by the brand and expressed through a ‘complete shop-ping experience’ (Danziger, 2006)

Hence, success often depends on the alignment between substance (material goods) and the image perceived by customers, ie brand position-ing (Moore and Birtwistle, 2004; Girod, 2005) A major source of competi-tive advantage is the degree to which organizations are able to orient their practices towards building the brand and sustaining it over time (Bridson and Evans, 2004) Many examples are available, witnessing the achievement

of good results thanks to a business model aligned towards the brand’s value For instance, Gucci’s maximization of internal controls with respect

to product sourcing, brand communications and distribution was a way to achieve successful re-positioning as a luxury brand (Moore and Fernie, 2004)

In the luxury market, brands have achieved even further importance

as the concept of luxury shifted from possession (ownership of luxury goods

or ostentation of ownership as a status symbol) to experience (ownership

is often a pre-requirement but the aim is improving quality of life) This trend led all luxury brands (not only fashion-sensitive ones) to develop explicit branding strategies and to consider them as a crucial element of competition (eg Ferrari’s leverage waiting list of about 18 months to create

a ‘waiting experience’ which fosters the feeling of uniqueness and exclusivity) (Kesner and Walters, 2005) Such strategies aim at creating a solid ‘brand equity’ (ie the overall value of a brand, according to the Marketing Science Institute ‘the set of associations and behaviours on the part of the brand’s customers, channel members and parent corporation that permits the brand to earn greater volume or greater margins than it could without the brand name and that gives the brand a strong, sustainable and differentiated advantage over the competitors’) associated to a ‘brand image’: typically this requires a set of steps such as choosing a target positioning, defining the brand identity and transforming it into visible aspects in order to enhance reputation Brand identity is what a company wants a brand to be, the values it must represent, the whole of mental associations Brand image

is what is perceived by customers and stakeholders

In particular, capturing, maintaining, or increasing market share, either for fashion or luxury products, requires a specific branding/marketing/

merchandising strategy Suggested tactics include correctly targeting narrowly defined segments of potential consumers with the appropriate marketing mix; defining a high brand image coherently with the target pricing level;

identifying unmet needs and sales opportunities; using carefully designed packaging; increasing advertising budgets to educate consumers (D’Arpizio

et al, 2005; Steinberg, 1998; Summers et al, 2006).

No one could deny that achieving the appropriate brand positioning and building its reputation is an absolutely necessary condition for success

in the luxury market Nonetheless, the relevance of whatever lies beyond the market surface (eg operations and supply chain) is now acknowledged by both academics and practitioners: in other words, it is necessary to provide substantive demonstration of excellence, delivering up to the expectations created by the brand pledge (Aaker, 1991)

Support for this opinion comes from one of the most influential men of the luxury world, Bernard Arnault (CEO of the LVMH group), who – at the International Herald Tribune’s Luxury Business Conference in 2007 – declared that ‘high standards can and must be maintained throughout the supply chain, from production to distribution in retail stores’ A further eminent opinion comes from François Pinault (CEO of the PPR-Gucci group) who (at the at International Herald Tribune 2006 Luxury Conference) suggested going back to considering ‘product’ as the fundamental element for competing in the luxury business (ie paying more attention to product itself would allow a company to focus on the highest end of the luxury market)

Table 6.1 summarizes the recent trends in the luxury business and the related challenges for SCM

tablE 6.1 The challenges of supply chain and operations in

the luxury business

Recent trends in the luxury

Success in recent years was based

on building brand image and on extending product range:

● loss of ‘material’ competitive advantages;

● risk of diluting brand exclusivity into accessible lines.

Back to basics – market orientation, product quality, service level, mastering core competences –

to regain the ability to deliver up to the promises made by the brand

Consumers are now more literate as regards quality in product/services and accept a premium price when their requirements are satisfied

Guaranteeing adequate quality even though (part of) the production process is outsourced

Fashion effect: product lifecycle is every day shorter

Flexible and responsive SCs

Rising attention to operations and SCM, with a number of companies currently restructuring their supply chains (Prada, Bulgari, Versace, Ferragamo )

SCM is now one of the top priorities

in management’s agenda, operations are more stressed

The soaring of scale and bargaining power of major retail buyers in the market, the advent of own brands retail networks, globalization of luxury consumers

Attention to distribution and retail

Wide use of outsourcing of manufacturing processes; off­shoring

of manufacturing activities and sourcing on a global scale

Need to control and coordinate a large and geographically scattered network

within the supply network Different requirements depending

on the type of luxury (eg accessible lines require availability; exclusive segments require superior service)

Need to develop a differentiated approach

typical structure of the inbound and outbound supply chain

To be able to analyse the SCM strategy of companies in the luxury and fashion industry, it is important first of all to briefly discuss the typical struc-ture of both the ‘upstream’ supply chain (how raw materials are flowing towards the manufacturing sites) and the ‘distribution channel’ (how end products are distributed to the final consumer), with the standpoint of the

‘brand owner’ (BO)

Inbound supply chain

The typical structure of the inbound supply chain – as represented in Figure 6.1 – encompasses suppliers of raw materials, suppliers of com-ponents and finished goods, and sub-suppliers

FigurE 6.1 The typical structure of an inbound supply chain

Brand owning company

Raw materials suppliers Finished prod.suppliers

Contractors

contractors

Sub-In comparison with other industries (such as the aerospace or the motive), the idiosyncrasies of such a configuration are a sign of quite a nạve supply chain strategy, and – if not properly managed – could become a relevant issue threatening overall supply chain performances:

auto-● high fragmentation of the production system, with a plethora of actors, each one taking care of a tiny part of the overall process;

● ‘captive’ relations with subcontractors – often working for the BO

as their sole customer;

● lack of formalized, written agreements, let alone long-term contracts;

● outsourcing of some design activities to finished product suppliers – this is not an issue, provided that this practice is limited to extension lines and lower positioning products;

● customized raw materials – this is a strength for higher-positioned, luxury products; yet, customized materials require proper and careful production planning and inventory management.

Outbound supply chain (distribution channel)

The typical structure of the outbound supply chain, depicted in Figure 6.2, encompasses the two noteworthy cases of directly operated stores (DOS) and independent trade (including a gamut of retail formats, from stand-alone shops to department stores)

Ownership and control of the trade, along with the duration of the product lifecycle, are significantly influencing management choices in the outbound supply chain (in terms of IT tools, assortment planning, demand forecasting, approach towards replenishment)

FigurE 6.2 The typical structure of a distribution channel

Brand owning

Independent trade

Directly operated stores

frameworks for company classification and supply chain strategy selection

A study involving several Italian brands (Castelli et al, 2009) provides a

useful model for classifying fashion companies on the basis of two mental elements of the competition in this market, ie the target positioning

funda-of the brand and the duration funda-of the product lifecycle (shelf-life)

Indeed, many approaches were proposed for classifying fashion-luxury brands with respect to their positioning on the market For instance, Fernie

et al (1997) observe that most of the companies operating in the fashion

luxury business manufacture and sell, beside their exclusive ‘haute ture’ products, one or more ‘diffusion lines’: these are relatively low priced and available in relatively large volumes, in order to reach a wider con-sumer segment and introduce them to the brand’s lifestyle Beverland (2004) divides the total market for a product type into four classes: the mass level

cou-(addressed as ‘bulk’) plus three premium levels These go from premium

to super-premium to icon level and present growing relevance of exclusivity

as a critical success factor Dubois and Czellar (2002) indicate that siveness and desirability increase moving from ‘prestige’ brands (which are characterized by high quality or performances) to ‘luxury’ brands (which in addition include perception of comfort, beauty and refinement) Catry (2003) splits the luxury market between exclusive goods, which rely on rarity in terms of natural shortages (of materials and manufacturing capacity), limited editions or in terms of techno-rarity, from more accessible lines in which rarity is basically ‘information based’, eg achieved through selective distribution, elitist shopping atmosphere, price, provenance from heritage centres, packaging, combination of two brands Silverstein and Fiske (2003) identify the ‘new luxury’ category where consumers are not so much inter-ested in the product itself as in its brand image Indeed, ‘new luxury’ refers

exclu-to goods, which are not necessarily rare or manufactured in low volumes:

they achieve the ‘luxury good’ status thanks to design, to additional services

or to the aura created around the brand The emergence of ‘accessible luxury’

products is partly a result of the ‘trading up’ tendency characterizing sumption habits nowadays

con-Two classification variables: target positioning of the brand and duration of the product lifecycle

D’Arpizio (2007) identifies three classes for luxury goods, observing that different performances are achieved in different markets The same three categories are consolidated by the Fashion&Luxury insight of Bain &

Altagamma (Altagamma, 2008):

● Absolute luxury products, characterized by elitism, heritage and uniqueness (eg Harry Winston, Hermes) These products constitute the luxury goods segment that traditionally drove the market and indeed is still strong in one of the most important markets, Japan

● Aspirational luxury products, which are recognizable and/or distinctive, and represented by such brands as Gucci and Louis Vuitton These represented the largest rate of luxury goods growth

in the United States

● Accessible luxury products, characterized by affordability, status and membership, and represented by such brands as Coach and Burberry

In the past few years, this category achieved a huge growth rate in Asia-Pacific (excluding Japan) – nearly 2.5 times greater than the global average for ‘accessible luxury’ sales growth This leads to the conclusion that sales growth in Asia-Pacific is driven by a high degree

of entry-level access to luxury goods

As suggested by an in-depth analysis of the literature, beyond the three types

of luxury listed above, also the category of mass-market goods should be included when dealing with the fashion business

The second classification variable, ie duration of lifecycle or shelf-life, finds much reference in the literature dealing with supply chain, often with

specific reference to the fashion industry For instance, Cigolini et al (2004)

specifically suggest the most suitable supply chain strategy approach ing on lifecycle duration and explicitly cite a fashion company as a typical example of short lifecycle products However, despite the lifecycle of fashion products being surely shorter than in other industries, a further distinc-tion can be made

depend-According to Jacobs (2006) it is necessary to distinguish, at least, between fashion and continuative products: the former are proposed for just one season, while the latter are sold for several seasons The recent success

of fast-fashion brands and the introduction of special collections led to

a further subdivision of fashion products resulting into three classes:

● Continuative items: products that have a lifecycle longer than

20 weeks These include both basic or iconic items (that since the conception phase are meant to stay on the market for several years) and carry-over items (products that are initially included in seasonal collections but, due to their success, are proposed again in the following seasons)

● Seasonal items: products that have a lifecycle of about 20 weeks (one season)

● Fashion items: products that have a lifecycle of about 10 weeks or shorter These include cruise collections, fashion capsules, fast fashion items and so on

The resulting classification scheme

By segmenting the companies operating into the fashion industry according

to the segmentation variables introduced in the previous subsection, the classification scheme presented in Figure 6.3 emerges

Along the horizontal axis, some consolidated models for supply chain strategy provide useful suggestions, at least when dealing with the lower part

of the matrix, where accessible luxury firms and brands are placed According

to Christopher and Towill (2002) or to Cigolini et al (2004), the more we

move to the right, the more the supply chain strategy should shift from lean

to agile In particular, a fast-fashion approach could be suitable for brands/

items competing in the lower-right portion of the matrix

It is important to notice, though, that fashion companies typically offer a portfolio of items and brands with different positioning on the matrix, hence sometimes antithetic approaches might coexist within the same company

Applying, for instance, Fisher’s model (1997), items positioned on the left side of the matrix could be assimilated to functional products for which an efficient supply chain could fit Indeed, these items are typically characterized by low variety and a predictable demand (at least at aggregate level – demand forecasting at retail store level is much more problematic);

FigurE 6.3 Classification of fashion items

Absolute luxury

Aspirational luxury

Accessible luxury

deliveries up to finished product warehouses can be planned in advance

Basic and continuative products often also have low contribution margins:

hence, it is fundamental to minimize supply chain costs through the nation of non-value-adding activities Further actions in order to pursue efficiency include suppliers’ selection based on costs, maximizing plants and workforce utilization rate, preventing excessive expenditures in innovation, restyling and promotion

elimi-These guidelines do not properly work when it comes to iconic items (typically positioned on the upper-left area): despite their being character-ized by low variety, demand predictability and long lifecycle – which would suggest classifying them as ‘functional’ products – their high contribution margins and, above all, the required excellence in terms of material quality and service level suggest that putting the priority on efficiency along the supply chain is not a good idea, as it could jeopardize the product/brand image (through bad quality or low service level)

In contrast, moving towards the right side of the matrix, a more sive supply chain is advisable, in which the stress on innovation (which often means large investments on style, design, total look collections, in-store experience, testimonials, etc) is paramount and high product variety is the natural consequence Hence, the whole supply chain should be aiming at responding to market demand rapidly and with an appropriate product offer

respon-This would require the deployment of a consistent supply chain strategy, with such actions as: monitoring the target markets in order to identify immediately new opportunities and trends; developing appropriate retail channels; accurate stock planning in order to balance stock-out and left-overs; applying design-for-SCM techniques; reducing lead times as much as

possible; selecting suppliers on the basis of speed and flexibility; increasing the number of outsourcers in order to have buffer capacity; collaborating with suppliers, manufacturers and retailers in order to maximize the flexib-ility of the whole system.

However, when dealing with the higher segment of the market, this type

of supply chain approach also presents some drawbacks For instance, it would not be so easy to keep a buffer of manufacturing capacity when the heritage of craftsmanship is a critical success factor or when technical lead times cannot be reduced Moreover, extreme luxury companies and brands typically tend to avoid the ‘fashion effect’, thus reducing seasonal items and – possibly – altogether eliminating fashion ones For such com-panies, the style and design of a real luxury object is often regarded as time-less and, thus, evergreen by definition (which, by the way, reinforces the ethical message brought forth by luxury firms – that luxury must be and indeed is a sustainable business, trying to run away from the consumeristic mindset of fast fashion)

Refining the classification: the case of absolute luxury

As pointed out in the concluding remarks of the previous section, and summarized in Figure 6.4, whereas traditional supply chain models and theories could easily be transferred and applied to the case of accessible luxury and fashion companies, the case of extreme luxury needs to be addressed with more attention

FigurE 6.4 Application of Fisher’s (1997) model to fashion items

Absolute luxury

Aspirational luxury

Accessible luxury

LUXURY PRODUCTS

WHICH SUPPLY CHAIN MODEL?

INNOVATIVE PRODUCTS

RESPONSIVE SUPPLY CHAIN

FUNCTIONAL PRODUCTS

EFFICIENT SUPPLY CHAIN

Supply predictable demand efficiently at the lowest possible cost Maintain high average utilization rate Generate high returns and minimize inventory throughout the chain Shorten lead time as long as

it doesn’t increase cost Select primarily for cost and quality Maximize performance and minimize cost

Respond quickly to unpredictable demand in order to minimize stockouts, forced markdowns, and obsolete inventory Deploy excess buffer capacity Deploy significant buffer stocks

of parts or finished goods Invest aggressively in ways to reduce lead time Select primarily for speed, flexibility, and quality Use modular design in order to postpone product differentiation for as long as possible

In fact, Caniato et al (2009) studied the application of consolidated

supply chain strategy models to the luxury segment of the market and lighted inadequacies of previous supply chain strategy literature Hence, they first identified some useful classification variables with a relevant impact on the supply chain strategy selection They were then able to iden-tify common choices along the supply chain for three clusters of luxury

high-companies (Caniato et al, 2011).

A total of 15 in-depth case studies were performed, involving many Italian luxury companies For each company, the most representative pro-duct family was selected and analysed Considering figures related to those product families, companies were then classified according to their selling volumes (high/low, in terms of units sold worldwide per year) and product complexity (high/low), obtaining the following three clusters, which proved internally homogeneous with respect to the practices in use along the supply chain:

● cluster 1 typically includes large fashion luxury companies, with worldwide renowned brands, selling high volumes of products;

● cluster 2 encompasses niche brands, selling relatively low volumes

of excellent quality products;

● cluster 3 is constituted by fairly large firms, manufacturing and selling complex products in extremely low volumes

Cluster 1: high volumes and low complexity

In terms of CSF, brands in Cluster 1 are placing most emphasis on building

an emotional appeal for the brand as well as emphasizing premium quality;

other relevant aspects are style and design, country of origin and heritage

of craftsmanship However, common operational performances are also very relevant, especially service level and delivery lead time to retail stores

Facing a short product lifecycle and a scarcely predictable demand, the supply chain has to be efficient in the production phase and flexible during the replenishment phase in order to follow a demand pattern that is unpre-dictable both in terms of volume and content Firms typically apply a make-to-stock strategy for just a part of the product range (ie they implemented a

hybrid approach, in line with Bruce et al 2004) Indeed, a pure make-to-stock

approach is not suitable for luxury companies, as the high value of their products generates a significant risk of obsolescence Electronic management

of purchasing orders and sales monitoring technologies can be introduced

in order to better follow the demand Continuative items (for which lescence risk is lower) are planned and produced in large batches

obso-Although theoretically compatible with the case of low complexity and high volumes, offshoring strategies are rarely used In addition, offshoring could negatively affect service level and delivery lead times Within the ana-lysed sample, only entry-level products and some accessories are produced

offshore This is a major difference as compared to the mass market, where production is heavily offshored.

Outsourcing is a common practice While in the mass market this happens for commodity items and/or for the most labour-intensive production phases, luxury companies often outsource in order to access specialized know-how, or even craftsman skills, since heritage of craftsmanship is a relevant CSF Of course, strong coordination with supply chain partners is mandatory in order to ensure homogeneous quality and service level A typical configuration is that of Italian luxury leather goods brands that outsource manufacturing of leather goods to a wide network of very small and specialized local companies, managing the relationship with these ateliers as if they were part of the focal company Strict control is applied over components and raw materials utilization, order scheduling and delivery planning, both to ensure compliance with production plans and

to prevent the risk of counterfeiting via parallel markets

The sourcing process must ensure high quality in raw materials and components; every phase of the manufacturing process must comply with the desired quality level to deliver a genuine, premium-quality product As

a consequence, materials must often be sourced from particular countries (eg tanned leather from Italy, cashmere wool from India, or crocodile from Australia) and reliable suppliers

Vendor selection criteria vary according to the supplier type Superior quality is the main criterion when purchasing critical materials (eg leather

or special fabrics for leather goods manufacturers), while suppliers of standard materials (eg small metal components for bags and shoes) are selected on the basis of their cost/service level ratio Companies often prefer

to buy the most critical materials in advance and keep them in stock (eg raw cashmere wool) in order to secure the finest quality batches and/or to reduce dependence on supplier delivery performances

As for the distribution process, retail channels should be selected, ized and managed in alignment with the brand’s most important CSFs (Lee,

organ-2004; Brun et al, 2008) Product display, availability and variety at the point

of sale are essential for confirming the brand aura of excellence; in ticular, a complete shopping experience conveys the appropriate emotional appeal, which is another relevant CSF, and contributes to customer satisfac-tion and to the feeling of direct contact with the manufacturing company

par-Beyond selling through department stores and independent shops, control over the distribution network is pursued mainly through two approaches:

directly operating a network of points of sale, often designed by famous architects as concept stores; this approach is often limited by financial con-straints and by the lack of space in the most attractive and prestigious areas (eg, historical city centres); and alternatively, relying on non-directly operated mono-brand points of sale (ie, franchising stores) and training the shop’s personnel regarding product features and customer relationships

In any case, electronic ordering systems, monitoring sales and tracing customer information are useful tools for effectively managing the channel

In the most advanced cases, there is the possibility of transhipment among shops (ie shop managers have real-time visibility of the stock available in other shops; this way, one shop facing a stock-out of one particular item variant, colour or size could order and receive it directly from another shop in a very short time, without having to wait for the long lead time replenishment from the factory).

A summary of the findings related to companies in Cluster 1 is given in Table 6.2

complexity luxury brands

Companies in the cluster:

● Global brands

● Accessible, Aspirational and Absolute brands

● Made in Italy as a major CSF (respect

of the MiI label rules)

Other CSF: emotional appeal, recognizable design, brand reputation

● Delivery lead times and availability are market requirement

Demand/

Product

Seasonality, volatile fashion trends, short maturity period, some carry­over products

Manufacturing Flexibility in design and

engineering Prevalent Make To Stock approach ➔ efficient for carry­over products

IT tools in use: ERP, EDI Outsourcing for accessing specialized competences, strict outsourcer control Off shoring for non­core items

Sourcing Critical materials of finest

quality from areas of excellence Established relationships, dedicated investments Information sharing, collaboration

Distribution Distribution channel control

through mono­brand stores (owned or franchised) Ensure in store availability and variety

Electronic ordering systems Fidelity programs

Trans­shipment of goods

Cluster 2: low volumes and low complexity

Cluster 2 includes small luxury fashion companies, typically niche brands, selling relatively low volumes of excellent quality products Indeed, such companies’ reputation reflects the content of their products (materials and manufacturing processes) rather than the symbolic value of their brands

The main luxury CSFs for Cluster 2 are premium quality, country of origin and craftsmanship; reputation of these companies is also based on excellent service levels Attention to costs is higher than in the previous cluster

Due to their small size, these players have less freedom in formulating their strategies; for instance, they can hardly own a network of directly-operated points of sale and their bargaining power over suppliers is limited

As regards manufacturing, due to their size, these companies often adopt a purchase-to-order or make-to-order policy, with orders to be placed soon after the presentation of new collections, as required by their long manufacturing lead times; furthermore, due to small production volume and significant demand variability, these companies prefer not to carry the stockholding costs implied by a make-to-stock approach In contrast to brands

in cluster 1, these players offer large independent retailers the possibility of exclusive customized products

The products of these firms often require high-quality hand-made details, hence the availability of specialized craftsmen is fundamental; handcrafting also contributes to making each item a unique piece, thereby increasing its degree of exclusivity

Outsourcing is a common practice, but only within national boundaries:

when the ‘country of origin’ is a fundamental CSF, all production phases (even when outsourced) should actually take place in Italy For companies

in this cluster the label ‘made in Italy’, synonymous with high quality and original design, strongly contributes to justify the premium price There are further reasons to keep production local: offshoring may require a significant investment and would have a negative impact on service level

Suppliers and outsourcers of specific phases are carefully selected and the company strictly monitors their operations In some cases, luxury firms out-source all phases of manufacturing to several neighbouring craftsmen or small companies often belonging to the same industrial district, which are virtually considered as their own production department Typically, each product line is assigned to a single outsourcer in order to ensure consistency

in the product’s aspect

In contrast with companies in Cluster 1, the focal company often cannot rely on a bargaining power advantage over its outsourcers, due to its small size Therefore, the focal company is quite vulnerable to delivery delays

or shortages and at times, larger outsourcers can even dictate contract conditions

For these firms, it is essential to maintain long-term relationships with suppliers As in Cluster 1, suppliers of critical materials are evaluated on the basis of quality while those supplying standard materials are assessed on

tablE 6.3 Common supply chain choices for low volumes/low

complexity luxury brands

Companies in the cluster:

● Niche brands going global

● Accessible, Aspirational and Absolute brands

● Made in Italy as a major CSF (respect of the MiI label rules) together with Heritage of Craftsmanship and Premium Quality

Manufacturing Purchase To Order, Make To Order

Hand making for several details Outsourcing: national outsourcing

to small firms, outsourcers control and coordination Parallel sourcing

Sourcing Critical materials of finest

quality from areas of excellence Established relationships Frame agreements, open orders

Distribution Established relationships

Official resellers

the cost versus service level ratio Other relevant criteria when selecting

a supplier are past experience working for other luxury players and sive specialization or unique expertise with a certain material or manufac-turing process

exclu-These companies are more focused on the product than on the brand’s emotional aspects Hence, distribution and marketing investments are very limited Often, they do not own mono-brand stores but rather prefer to rely

on the reputation of experienced luxury retailers However, the lack of directly operated points of sale makes it harder to control the distribution network and to access sales data and customer information

Evidence related to Cluster 2 are summarized in Table 6.3

Cluster 3: low volumes and high complexity

The third cluster includes large firms that sell low volumes of complex products that can be included in the fashion market if this is considered in

a larger meaning (ie beyond apparel and leather goods, also home-decor,

furniture, watches and jewellery etc, have now assumed a fashion value in the consumers’ minds) The technical performance of the product is at the origin of their brand’s prestige.

This cluster will be discussed in more general terms, as companies in this cluster are typically operating outside of the ‘strictly speaking’ fashion world

In terms of manufacturing, these companies produce based on actual orders or using an assemble-to-order policy when offering customized pro-ducts with short lead times Indeed, in this cluster, a remarkably strong request for customization comes from the market; consequently, manufac-turing processes must be flexible enough to accept even last-minute order changes

A high level of vertical integration is observed, revealing the desire to exert direct control over most of the production process in order to ensure quality and uniqueness Outsourcers, when used, are selected on a national basis in order to achieve flexibility, short lead-times and service level, rather than for country-of-origin reasons Outsourcers are usually small and medium firms; each year, the luxury company defines a shared production plan and,

on this basis, signs an agreement with the outsourcers, hereby booking a certain amount of their production capacity Thanks to long-term relation-ships, strengthened by dedicated investments, luxury firms are obtaining from their supplier base outstanding process and product quality

Due to product complexity, the upstream network is very articulated and coordination tools and vendor-rating processes are needed Company size and long-term relationships allow companies to strictly control their first-tier suppliers and to help them in their technical development

Suppliers could play a part in the innovation process, and some of the most critical components they provide have a strong impact on perform-ances of the final product and also on the perceived quality, strengthening the luxury status of the brand (think about a Ferrari supercar proudly sport-ing Brembo brakes or a Bose sound system) For these reasons, suppliers are selected primarily for quality, reputation and innovation capabilities

Depending on the product category (eg yachts, cars, wood and furniture), these companies might prefer to distribute their products through mono-brand, directly-operated stores or multi-brand independent dealers The selling process is accomplished through an intense dialogue among the customer, dealer, firm and other relevant actors such as architects before the product takes its final shape These firms pay great attention to service level, which

is achieved through initial advising, on-time delivery, before- and after-sales assistance and other benefits needed by luxury customers As a consequence,

no matter what the distribution channel selected, these companies monitor strictly the service level of their dealers

Findings related to Cluster 3 are summarized in Table 6.4

tablE 6.4 Common supply chain choices for low volumes/high

complexity luxury brands

Companies in the cluster:

● Large firms

● High item value

● Cars, yachts, furniture ➔ investments more than consumables

● Brands are both technical and symbolic in their nature

● Global brands, niche market

● Aspirational and Absolute brands

● Technical performances are

a major CSF and are at the base of brand’s prestige

Manufacturing Purchase To Order, Assembly To Order

Levelled scheduling, Just In Time Flexibility for ‘last minute’

customization Outsourcing for very few production phases: long term relationships, dedicated investments

National outsourcers chosen for flexibility reasons

Sourcing Structured Vendor Rating

Strategic renowned brand suppliers Excellent suppliers from different industries

Very articulated upstream network

Distribution Direct marketing channel

Mono­brand directly operated stores Multi brand dealers: subject to ratings

noteworthy examples of supply chain configurations

To give a better idea of the configuration of specific luxury fashion supply chains, the following three cases excerpted from Brun and Castelli (2008) are presented Albeit being constituted by all mid-size, Italian companies, the sample is quite differentiated in terms of product categories they produce and distribute (shoes, leather bags and accessories, swimwear and underwear), and different positioning of their brands (ranging from luxury to diffusion lines) This will allow a better comprehension of different supply chain con-figuration and management strategies

A general summary of the three cases is given in Table 6.5, while deeper insights are provided in Boxes 6.1, 6.2 and 6.3

tablE 6.5 Synoptic table of the three noteworthy examples

Core business Luxury shoes Bags and suitcases Swimwear and

underwear

Product categories

Brands positioning and personality

Fratelli Rossetti

(company owned):

luxury brand

Excellent quality, heritage of craftsmanship, made in Italy

Bric’s (company

owned): high positioning brand

Innovation, design, high quality.

Parah (company

owned):

luxury brand

Excellent quality, characterizing design, innovation, made in Italy.

Flexa (company

owned): diffusion brand Sport, good quality, quality/price.

Kipling (licence for

Retail channels DOS mono­brand

stores

DOS mono­brand stores

DOS mono­brand stores

Franchising mono­brand stores

Specialist independent retailers

Franchising mono­brand stores Specialist

independent retailers

Department Stores

Specialist independent retailers Department stores

(corners)

Factory outlets Department stores

(corners) Factory outlets Airport lounges Factory outlets

Airport lounges

The ‘Calzaturificio Fratelli Rossetti SpA’, with a turnover of €78 million in

2012 and a year-on-year growth of about 10 per cent in the past few years,

is a luxury shoes manufacturer, famous worldwide for the excellent quality

of its products which allowed the company to achieve a very high brand reputation Such reputation is mainly due to the heritage of craftsmanship

as regards the company’s core product – high quality formal men’s shoes

The company, whose headquarters are located in one of the most renowned Italian shoe districts, started its activity at the beginning of the 20th century and, along the years, expanded its competences from bare shoes manufacturing to product design both in terms of functionality and style, so incorporating the current trends which require every day more style content in fashion products

Men’s shoes were initially sold under the company name brand (Fratelli Rossetti), while women’s shoes were added later, in order to complete the product range In contrast to a common misbelief, the manufacturing process for high quality shoes not only includes many handmade stages but is also extremely complex, involving several phases and a number of time constraints (eg 24 hours are needed to properly dry the glue to fix the two main subassemblies of the shoe) Furthermore, the process is significantly different for men’s shoes and women’s shoes, not only because of physiological differences in the shape of the feet but also due to differences in component type and in the variety range

Such structural differences in the product are the reason why, while the process for manufacturing men’s shoes is completely performed in the company facilities in the original Italian district (with a few exceptions for special refining phases required by particular items), the company decided

to outsource the manufacturing process for women’s shoes to specialist manufacturers in the same district Hence, the company – as regards women’s shoes – manages internally the design phase, the distribution process and the material selection process, while outsourcing all the manufacturing phases as well as the product development and engineering Outsourcers are selected on the base of product quality and service level (mainly delivery lead times) and are therefore located within the district, also in order to allow the use of the ‘made in Italy’ label

Lately, the company also introduced the brand Flexa for diffusion purposes, ie inviting new consumer segments to approach the company’s offer With Flexa, the company offer expanded to a new product category,

Box 6.1 Calzaturificio Fratelli Rossetti

namely sports shoes As these products are meant to offer a good quality/

price balance while – given the lower brand positioning – the ‘made in Italy’ label is not required, the company decided to design the products in house while delocalizing all of the manufacturing phases to outsourcers in eastern Europe

The company’s products are sold through a variety of retail channels

Some differences can be observed in the product mix available to the different channels:

● DOS mono-brand stores have a precise style characterization, in terms

of store design, furniture, colours and service standards The store personnel is directly employed by the company and is required to attend a training course in order to correctly communicate the company and brand image These stores have access to the whole product range, and the merchandise mix available in each store is centrally decided by the company’s marketing department; these stores also benefit from direct contact with the company (through a shared information system) and from the possibility of replenishment with short lead times (often the company manufactures Made to Order products to deliver to these stores) Thanks to the shared information system, the company can access sales data, thus getting a better insight on the current demand and an input for the forecasting process

● Franchising stores present the same store design, style and image characterization as DOS stores; in contrast the personnel is not directly employed by the company and therefore not necessarily trained to communicate the brand These stores can also access the whole product range, but they mainly interact with the company placing one order per season; sometimes exceptions (eg buyback or transhipment between stores under special conditions) can be allowed Corners in department stores and in airport lounges are managed in the same way

as franchising stores

● Independent specialist stores do not have to follow strict requirements

in terms of store design, but are selected by the company on the basis

of the range of carried brands They can only access part of the company product collection and have to place orders exclusively during the selling campaign Their relationship with the company is intermediated by agents The company applies a Make to Stock manufacturing strategy for products destined for both franchising and independent stores

● Factory outlets are owned by the company and are mainly regarded as a way

to minimize the losses due to unsold products

● The company also designs and distributes leather accessories (bags, wallets,

key rings), but – as they are not regarded as core products – their production

is completely outsourced to specialist companies Moreover, due to the range completion purpose of such accessories, they are exclusively sold in the mono-brand DOS and franchising stores

The resulting supply chain configuration is depicted in Figure 6.5

FigurE 6.5 Calzaturificio Fratelli Rossetti: supply chain

configuration

Components Suppliers

Leather

Mono-brand DOS

Mono-brand franchising stores

Fratelli Rossetti

Independent multi-brand shops

Fabrics

Soles

Other materials

Italian outsourcers

Outsourcers

in Romania (Flexa)

Accessories (not shoes) Cut Assembly Brand owner Point of sale

’Bric’s Industria Valigeria Fine SpA’ (whose turnover is about €40 million) is

an Italian manufacturer of high quality travel suitcases, handbags, office bags and accessories (such as wallets, key rings, small leather cases)

The initial business, which dates back to the middle of the 20th century, was focused on leather travel suitcases and office bags, which were mainly sold locally (in northern and central Italy) The high quality of the products (which derived mainly from high quality leather sourced in Italy

Box 6.2 Bric’s Industria Valigeria Fine

and from exceptional craftsmanship capabilities) soon led to growing demand, not only from local customers: soon the company evolved from a small family-run business to an international player in the fashion market.

Other product types were added to the offer besides travel items: the natural product line extension was towards women’s handbags, which could easily be manufactured in the existing production facilities

However, the introduction of such products required the company to achieve a good level of understanding as regards product design, not only

in terms of manufacturing and material requirements but also in terms of style issues Further development in terms of products was the

introduction of materials different than leather, for instance fabric and polymeric materials Such new materials, on the one hand, required new manufacturing competences and, on the other hand, proved much less expensive than genuine leather

At the same time, the company realized that the physical characteristics of their products were no longer enough to compete on the fashion market and understood the need for establishing a proper fashion brand Thus, a strong marketing effort was put on the creation of a set of positive fashion associations to the company name, ie brand values From that moment on, the stage of product design had to explicitly take into account the need to create brand-consistent collections

As demand and product variety increased, the company differentiated the manufacturing process for different items: the decision was to keep in house the whole manufacturing process for high quality leather goods and suitcases with high material technology contents, while production of low priced lines (low cost materials, sold at relatively low price on the consumer market in order to attract young fashion-sensitive people) was outsourced to companies in the Far East

Bric’s has a large network of suppliers and outsourcers Most of them work on the basis of spot orders or an annual contract Thanks to a long-term relationship, some high quality specialist outsourcers allowed the introduction of collaborative supply programs However, there is no IT supported information exchange with them, as their small size doesn’t allow significant IT investments

The main retail channel for the company’s products has always been that of independent specialist retailers, with some of whom the company was able to build a strong long-term relationship A relevant achievement, with respect to these partners, was the introduction of a shared

information system: each retailer communicates periodically (some of

them daily) its sales to Bric’s, which, in turn, provides updated information about its

inventory status The orders from retailers participating in such a system typically

have priority compared to orders from less loyal retailers

Recently the company expanded its direct activity to retail, by opening a network

of direct operated stores These are mainly flagship stores through which the

company is supporting its expansion to foreign markets: indeed flagship stores have

a strong brand establishment purpose As these stores are directly operated, their

access to the information system is enhanced compared to independent retailers

Sales data and inventories are visible in real time, so that demand trends can be

anticipated and replenishment of specific items can be centrally planned by the

company

Thanks to information sharing with DOSs and selected retailers, Bric’s was able

to replace, for some product families, the original Make to Stock policy with a Make

to Order one

From the beginning of the 90s, the company also acquired a licence for exclusive

distribution in the Italian market for the brand Kipling

The resulting supply chain configuration is depicted in Figure 6.6

FigurE 6.6 Bric’s Industria Valigeria Fine: supply chain

configuration

small metal

parts

special materials

leather

Local craftsmen

Specialized manufacturers

Bric’s factories

Kipling

Components

supplier Manufacturer/Assembler Brand owner Point of sale

Located in Italy / Western countries Located in Far East / Eastern Europe

Mono-brand DOS

Multibrand independent specialists Department stores Factory outlets

Bric’s

Outsourcer (Far East) Outsourcers (Eastern Europe)

Gruppo Parah SpA, with more than €30 million turnover and about 170 employees, is one of the world’s top 10 manufacturers of fashion lingerie and swimwear The company was established at the beginning of the 20th century as a craftsman shop of high quality lingerie The founder,

an Italian lady with a strong interest in fashion, identified the need for creating women’s lingerie products that were both comfortable and extremely stylish The natural product extension was in the business of swimwear: these items were introduced as soon as the activity shifted from a craftsman shop to an industrial company A third product category was recently introduced, ie concept wear, an apparel line characterized

by comfortable fabrics, casual purpose and fashion design

The exclusive positioning in the luxury niche of the market was seen as

a limitation for demand growth Hence, beside the original luxury lines for which the company brand (Parah) was renowned, diffusion lines were introduced under a different brand (Off Limits)

As time went by, the company realized that it was worth deciding which competences were to be kept in house and which could instead be delegated to outsourcers Nowadays the company keeps the processes of product design and new product development completely in house: indeed, product innovation (both in terms of style and functionality) is one of the critical success factors targeted by the company Furthermore, the company keeps the fabric cutting phase for the luxury lines in house, while the assembly phase is outsourced to local manufacturers, to allow for the use of ‘made in Italy’ labels In contrast, the whole manufacturing process is outsourced in the Far East for the diffusion lines As regards accessories (such as perfumes, scarves, gloves, small bags) both design and production are completely outsourced to specialized Italian

directly operated), independent specialist retailers, department stores and a

company-owned factory outlet:

● DOS mono-brand stores have a precise style characterization, in terms of store

design, furniture, colours and service standards The store personnel is directly

employed by the company and is required to attend a training course in order to

correctly communicate the company and brand image

● Franchising stores present the same store design, style and image

characterization as DOS stores; in contrast the personnel are independent from

the company and therefore not necessarily trained to communicate the brand

Both DOS and franchising mono-brand stores have access to the whole product

range and communicate sales data to the company via a shared information

system

● In contrast, department stores and specialist stores sell only the diffusion lines,

with the exception of some selected retailers located in downtown areas of

the international fashion capitals (such as Milan, Paris, New York), which can

also access the luxury lines

● Factory outlets are owned by the company and are mainly regarded as a way to

minimize the losses due to unsold products

The resulting supply chain configuration is depicted in Figure 6.7

FigurE 6.7 Parah: supply chain configuration

Local assemblers

Long-term suppliers

Occasional suppliers

Outsourcers (accessories)

Assembly Brand owner

(packaging)

Mono-brand boutiques Factory outlet

Department stores Independent shops Agent

Point of sale

Parah

Materials Suppliers Cut

a portfolio approach for supply chain strategy in the fashion industry:

the ‘segmentation tree’

Analysing the case studies introduced in the previous section, there are three main drivers affecting supply chain configuration and management choices:

product, brand and channel

Product structural characteristics are a driver for manufacturing sourcing and delocalization decisions For instance Fratelli Rossetti decided

out-to keep in house manufacturing for those products requiring its traditional competences (ie formal men’s shoes) while outsourcing manufacturing for products which could be better manufactured by other specialist firms (ie formal women’s shoes) A similar decision pattern can be observed in Bric’s example, in which case differences in the product also led to delocali-zation to low labour cost countries

Brand positioning is a driver for delocalization decisions: this happens for both Fratelli Rossetti and Parah Brand is also a driver for differentiating the distribution: an illustration is provided by Parah, which sells its luxury branded items exclusively in its direct operated stores

Retail channel (as it can be expected) is a driver for segmenting the tribution approach: indeed Fratelli Rossetti and Bric’s share demand and inventory information with their direct-operated stores and give them prior-ity in terms of access to the whole product range and delivery performances

dis-Distribution best practices – which can turn into a source of advantage – are

IT integration, visibility between companies and data exchange, eg Bric’s shares information with selected specialist retailers with whom it has long-term loyal relationships

The three cases, and in particular the one of Fratelli Rossetti, provide some insights in terms of a possible relevance hierarchy between the three proposed drivers for supply chain strategy segmentation Indeed, it seems that the principal segmentation driver (at least in the upstream part of the supply chain, ie manufacturing) is brand, which indeed affects the choice for delocalization: Fratelli Rossetti (luxury positioning) is to be manufac-tured in Italy, while Flexa (diffusion positioning) can be manufactured in low labour cost countries Secondarily, a further segmentation is made among different products within the same Fratelli Rossetti brand, ie women’s shoes are outsourced to specialist firms in order to ensure excellent quality: so pro-duct appears to be the second driver for supply chain strategy segmentation

Brand seems to be the main supply chain segmentation driver also on the downstream side of the supply chain: indeed franchising and direct-operated stores, characterized by strong identification with the company’s brand, can access the whole collection and have a direct relationship with the com-pany A further distinction is then made within the mono-brand stores: the product mix for the DOS is planned by the company and replenishment is allowed This indicates channel as the second driver for supply chain strategy

segmentation on the downstream side of the supply chain The resulting

‘segmentation tree’ in the three case studies is depicted in Figure 6.8

FigurE 6.8 Segmentation tree of the supply chain strategy in

the three case studies

Fratelli Rossetti brand is manufactured

in Italy while Flexa is outsourced in Eastern Europe

Within the Fratelli Rossetti brand there’s a further segmentation in men’s and women’s shoes Men’s shoes are manufactured in house, women’s shoes are outsourced to the same Italian industrial district

Parah:

Supply chain strategy segmentation based on brand.

In house manufacturing for luxury brand, outsourcing for diffusion brand

Different approaches are used for different retail channels

Fratelli Rossetti: supply chain strategy segmentation based on product, brand and channel

Bric’s: supply chain strategy segmentation based on product and channel

Manufacturing takes place in house for high quality/high end products, while outsourcing is used for other lines Different approaches are used for different retail channels

Conclusion

Evidence emerging from pages 134–42, as well as the results of the research

of Caniato et al (2011) confirm the idea that, when dealing with the luxury

segment of the fashion industry, the best supply chain strategy model is hardly identifiable Most of the fashion-luxury actors have very specific and unique features that often coincide with the key drivers for success on the market

Hence, the best takeaway for a supply chain manager of a luxury fashion company would be to consider suggestions from the literature, yet mixing and matching them into a unique supply chain strategy model according

to the very specific features of the company (as depicted in Figure 6.9) The overall strategy might then be used as a blueprint and spawn a number of specific operative policies, according to a ‘segmentation tree’, to cater for the

idiosyncrasies of the different brands, products and channels managed by the company (brand might be used as the main segmentation driver) Finally,

the supply chain manager should also be sure to adapt such a set of gies, in time, coherently with the brand(s) evolution

strate-FigurE 6.9 A ‘unique’, bespoke supply chain strategy for luxury

fashion items and brands

Absolute luxury

Aspirational luxury

Accessible luxury

UNIQUE SUPPLY CHAIN

INNOVATIVE PRODUCTS

RESPONSIVE SC

FUNCTIONAL PRODUCTS

EFFICIENT SC

UNIQUENESS IN DEVELOPING NEW PRODUCTS:

• Creativity-driven supply chain

• Focus on models and samples

• Parallel sourcing, co-design, partnership UNIQUENESS OF MATERIALS:

• Search and selection of suppliers

• Supplier-driven innovation UNIQUENESS IN MANUFACTURING:

• Vertical integration

• Handcrafting UNIQUENESS IN THE SHOPPING EXPERIENCE:

• Control of retail channels

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tesco’s supply chain management

Leigh Sparks

introduction

The transformation of Tesco in the last 35 or so years is one of the more remarkable stories in British retailing (Seth and Randall, 1999, 2005; Ryle, 2013) From being a comparatively limited ‘pile it high, sell it cheap’ down-market retailer, the company has become one of the world’s leading retail businesses Tesco are dominant in their home market (Burt and Sparks, 2003) and significant on the international stage More than 65 per cent of Tesco’s store floorspace is now located outside the United Kingdom, with the proportion of international stores (53 per cent), international sales (33 per cent) and international profit (34 per cent) growing rapidly (Figure 7.1) Its loyalty card and e-commerce operations are generally considered to be world-

leading (Humby et al, 2003).

Some of those involved have provided accounts of this transformation (Powell, 1991; MacLaurin, 1999; Leahy, 2012; Ryle, 2013) Some aspects

of the Tesco operations have been discussed publicly by their executives (eg Mason, 1998; Kelly, 2000; Jones, 2001; Jones and Clarke, 2002; Child, 2002) Tesco is also the focus of considerable academic attention (eg Burt and Sparks, 2003; Reynolds, 2004; Bevan, 2005; Palmer, 2004, 2005; Coe

and Lee, 2006, 2013; Dawson et al, 2006; Sparks, 2008; Lowe and Wrigley,

2009, 2010; Lowe et al, 2012) This literature emphasizes the fundamental

transformation of the retail business to meet changing consumer demands and global opportunities

The visible component of this transformation is seen in the locations and formats of the retail outlets and in the range of products and services that the company offers Customers are also aware of the changes through the constant reinforcement of the corporate brand Less visible, however, is the

FigurE 7.1 Tesco plc: an international business

(a) Sales floor space 1977–2013

supply chain transformation that has underpinned this retail success story

It should be obvious that the supply chain required to deliver a small range

of comparatively simple products to numerous small, high street stores in the 1970s is vastly different to the supply chain delivering the extensive breadth

of food and non-food products in a modern Tesco Extra hypermarket and the availability levels required to run modern Tesco Express convenience stores and online shopping via Tesco.com and Tesco Direct Some academic

(c) Turnover 1947–2013

1 10 100 1000 10000 100000

the changing tesco supply chain:

establishing control and delivering efficiency

The current retail position of Tesco is far removed from the origins of the company Tesco made its name by the operation of a ‘pile it high, sell it cheap’

approach to food retailing (Sparks, 2008; Ryle, 2013) Price competitiveness was critical to this and fitted well with the consumer requirements of the time The company and its store managers were essentially individual entre-preneurs The growth of the company saw considerable expansion until,

by the early 1970s, Tesco had 800 stores across England and Wales This entrepreneurial approach to retailing, epitomized by the company founder Sir Jack Cohen, was put under pressure, however, as competition and consumer requirements evolved (Corina, 1971; Powell, 1991) Tesco had therefore to change

The emblematic event signifying the beginning of this transformation was Operation Checkout in 1977 (Akehurst, 1984) Dramatically, all shops were closed for four days, trading stamps were removed, stores re-merchandized and prices were cut nationally as a grand statement The business received

an immediate and considerable boost to volume as consumers began to see

a different approach to Tesco retailing After this initial re-positioning event and phase, Tesco began to better understand its customers, control its busi-ness and to move away from its down-market image (Powell, 1991) This retail transformation, however, brought into sharp focus the quality and capability of Tesco supply systems and its relationships with suppliers

Such concerns have remained fundamental during the subsequent rise of Tesco By moving away from its origins, Tesco changed its business Initially, the focus was on conforming out-of-town superstores, but since the early 1990s a multi-format approach has developed, encompassing hypermarkets, superstores, supermarkets, city centre stores and convenience operations

Online and multi-channel retailing has become a core activity The Tesco corporate brand has been strongly developed (Burt and Sparks, 2002) and

international ambitions have accelerated (Dawson et al, 2006; Lowe and

Wrigley, 2009) In all this, the supply of appropriate products to the stores and customers has been fundamental

Within the United Kingdom five main phases in distribution and supply chain strategy and operations can be identified First, there was a period dominated by direct delivery by the supplier to the retail shops Second, there was the move, starting after Operation Checkout, to centralized regional distribution centres (RDCs) for ambient goods Third, a composite distribution strategy emerged from the late 1980s Fourth, from the late 1990s there was

a focus on vertical collaboration and integration through an emphasis on a

‘lean’ approach to supply chains, resulting among other things in ‘stockless’

distribution Fifth, there has been an emerging focus on meeting the online and environmental challenges for supply chains

Direct to store delivery

Up to and including the mid-1970s, Tesco operated a direct to store delivery (DSD) process Suppliers and manufacturers delivered directly to stores, almost as and when they chose Store managers often operated their own relationships (Powell’s 1991 ‘private enterprise’, p 185) which made central control and standardization difficult to achieve Product ranges, availability, quality and even prices were inconsistent This DSD system, however, fell apart under the pressures of the volume increases of Operation Checkout

As Powell (1991, p 184) comments, quoting Sir Ian Maclaurin:

Ultimately our business is about getting our goods to our stores in sufficient quantities to meet our customers’ demands Without being able to do that efficiently, we aren’t in business, and Checkout stretched our resources to the limit Eighty per cent of all our supplies were coming direct from manufacturers, and unless we’d sorted out our distribution problems there was a very real danger that we would have become a laughing stock for promoting cuts on lines that we couldn’t even deliver It was a close-run thing.

Powell continues:

How close is now a matter of legend: of outside suppliers having to wait for

up to twenty-four hours to deliver at Tesco’s centres; of stock checks being conducted in the open air; of Tesco’s four obsolescent warehouses, and the company’s transport fleet working to an around-the-clock, seven-day schedule

And as the problems lived off one another, and as customers waited for the emptied shelves to be refilled, so the tailback lengthened around the stores, delays of five to six hours becoming commonplace Possibly for the first time

in its history, the company recognized that it was as much in the business of distribution as of retailing.

The company survived the initial supply system consequences of the success

of Operation Checkout by operational ‘fire fighting’; while problems occurred from the huge product volume increase, meltdown was avoided It was clear, however, that a total change in approach to supply and distribution would

be needed as the new corporate business strategy took hold

Centralization

The decision was taken to move away from DSD and to implement ization The basis of this decision (in 1980) was the realization of the critical nature of range control on the operations Store managers could no longer

central-be allowed to decide ranges and prices and to operate their own mini-empires

Concerns over the quality of product available to consumers in stores also suggested a need to relocate the power in the supply chain If the company was to be transformed and modern customers better served, as the business strategy (focused on ‘conforming’ superstores) proposed, then head office needed control over ranging, pricing and stocking decisions Centralization

of distribution, to manage the supply of products into stores, was the tool

to achieve this

Tesco replaced DSD with a centrally controlled and physically centralized distribution network and service (Kirkwood, 1984a, 1984b) delivering the vast majority of stores’ needs, utilizing common handling systems, with deliveries within a lead time of a maximum of 48 hours (Sparks, 1986) This involved a significant extension to the existing company distribution facilities and the building of new distribution centres (DCs), aligned more appropriately with the current and future store location profile Investment in technology, handling systems and working practices allowed faster stock turn and better lead times Components of the revised structure were outsourced, allowing comparisons among contractors and Tesco operated centres to compare practices and drive efficiency.

This strategy produced an organized network of centralized DCs, linked

by computer to stores and head office The proliferation of back-up holding points and individual operations at store level was reduced The introduction of centralization forced suppliers to meet Tesco’s operational demands and gave Tesco control over the supply of products to stores

stock-Suppliers were contracted to deliver into the distribution network and not direct to stores These centres were the hubs of the supply network, being larger, handling more stock, more vehicles and requiring a more efficient organization Centralization produced the necessary control over the busi-ness and fitted with the changed retail store strategy of the 1980s (larger

‘conforming’ out-of-town superstores) Figures 7.2 and 7.3 show the changing store profile and the impact of the distribution changes on corporate stock-holding The immediate impact of centralization on stock holding is seen clearly in Figure 7.3

FigurE 7.2 Number of stores and average size of stores, Tesco PLC

Average Store Size Number of Stores

soURCe: Tesco PLC, Annual Reports.

FigurE 7.3 Inventory in Tesco PLC, 1970–2013

0 10 20 30 40 50

so low that delivery frequency was less than desired and quality suffered

Delivery frequency was maintained, but at the price of high vehicle running costs and increased store receipt costs It was expensive to have on-site Tesco quality control inspection at each location, which meant that the standards of quality desired could not be rigorously controlled at the point of distribution It was also realized that this network would neither cope with the growth Tesco forecast in the 1990s nor, as importantly, would

empty-it be ready to meet anticipated higher legal standards on temperature control in the chill chain

The produce depot at Aztec West in Bristol opened in 1986 and sented the best of the centralized network Tesco could have made further investment in single-product distribution systems, upgraded the depots and transport temperature control and put in new computer systems, but this would still have achieved overall a less than optimal use of resources across the company and not been appropriate for the likely future requirements

to be distributed through one system of multi-temperature warehouses

and vehicles Composite distribution used specially designed vehicles with temperature controlled compartments to deliver any combination of these products It provided daily deliveries of these products at the appropriate temperature so that the products reached the customers at the stores at the peak of freshness The insulated composite trailer could be sectioned into

up to three independently controlled temperature chambers by means of movable bulkheads The size of each chamber could be varied to match the volume to be transported at each temperature on each journey

Composite distribution provided a number of benefits Some derive from the original process of centralization and control, of which composite is

an extension Others are more directly attributable to the nature of posite First, the move to daily deliveries of composite product groups to all stores in waves provided an opportunity to reduce the levels of stock held

com-at the stores and indeed to reduce or obvicom-ate the need for storage facilities

at store level The result of this at store level is the better use of overall space (more selling space) and greater in-store availability For the company

floor-a continuous reduction in stock levels resulted (see Figure 7.3)

The second benefit was the improvement of quality and its consequent reduction in wastage Products reach the store in a more desirable condition

Better forecasting systems minimize lost sales due to out-of-stocks The introduction of computerized sales-based ordering produces more accurate store orders More rigorous application of code control results in longer shelf life on delivery, which in turn enables a reduction in wastage This is

of crucial importance to shoppers who demand better quality and fresher products In addition, however, the tight control over the chain enabled Tesco to satisfy and exceed new legislation requirements on food safety (see Smith and Sparks, 2009b)

Third, the introduction of composite provided an added benefit in productivity terms The economies of scale and enhanced use of equipment provide greater efficiency and an improved distribution and supply service

Composite distribution required comparatively lower capital costs ationally, costs were also reduced through, for example, less congestion at the store Throughout the system, an emphasis on maximizing productivity and efficiency of the operations, enabled by new computing and other technologies, also produced lower costs and better service levels

Oper-The introduction of composite was, however, not a simple procedure

Considerable problems were encountered requiring Tesco to work closely with suppliers and distribution operators to reorganize and develop new and altered practices (Smith, 2006) The move to composite led to the further centralization of more product groups, the reduction of stock holding, faster product movement along the channel, better information sharing, the reduction of order lead times and stronger code control for critical products

Such changes are easy to list but hard to implement and achieve, and quired close working with, and changed behaviours of, a variety of supply partners (Smith, 2006)